Stock A beta is 1.2 and the risk premium of the stock in the
same industry is 5.5%. If the risk free rate of return is 3.5%,
calculate the expected return on stock A.
2)
Year |
2013 |
2014 |
2015 |
2016 |
2017 |
Return |
10% |
-2% |
5% |
8% |
11% |
Answer 1
Expected return = Risk free rate + (Beta x Risk premium)
Expected return = 3.5% + (1.2 x 5.5%)
Expected return = 3.5% + 6.6%
Expected return = 10.1%
Answer 2
r = rate of return of each year
n = number of years
Geometric return = 0.0629 or 6.29%
Stock A beta is 1.2 and the risk premium of the stock in the same industry...
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